We could be forgiven for thinking that Lloyds Banking Group (LSE:LLOY) is one of the FTSE 100‘s greatest bargains.
Created with TradingView
At 59p per share, the Black Horse Bank looks cheap across a variety of metrics. For 2024, it trades on a price-to-earnings (P/E) ratio of 9.2 times. It also packs a Footsie-busting 5.5% forward dividend yield.
Finally, a price-to-book (P/B) value of 0.9 indicates that the company trades at a discount to the value of its assets.
Created with TradingView
However, while its future could be bright, it’s my opinion that Lloyds shares could be a classic ‘value trap.’ Here are three reasons why I’m avoiding the business today.
1. Interest rate uncertainty
Hopes of interest rate cuts have propelled bank share prices skywards this year. But I think the Bank of England (BoE) may fail to slash rates as extensively as the market predicts, leaving the banks in danger of sharp reversals.
On the one hand, higher rates would be good for banks by boosting their net asset margins (NIMs). The difference between the interest they charge borrowers and what they offer savers widens at times like this.
Yet higher interest rates also weigh on loan growth at banks and push impairment levels higher. The problem is especially bad for Lloyds given its position as the UK’s biggest mortgage provider.
With inflation data on Wednesday (17 July) coming in hotter than expected, economists are predicting the first rate cuts to noe happen in September, later than previously expected. It’s a trend that could continue as wage growth continues to boom.
2. Growing competition
Rising competition’s a longer term problem for established banks like Lloyds. Indeed, the pace at which this threat is accelerating was underlined by Moneyfacts data this week.
It showed the number of savings products on the market shoot through 2,000. This is the highest level since May 2012, and reflects a rise in the number of savings providers to record peaks.
Lloyds’ strong brand power is helping it perform better than many other traditional banks. But I fear that the business is increasingly swimming against the tide. Several challenger banks are set to launch IPOs to turbocharge their growth plans. Revolut is also pushing hard to acquire a banking licence to substantially expand its product range.
3. Better banks to buy?
Finally, I believe that there are much better banking stocks for me to buy today than Lloyds. Take HSBC and Santander, for example. These UK shares also trade on rock-bottom P/E ratios, of 6.9 times and 6 times respectively. In fact, these readings beat Lloyds which sits above 9 times.
On the downside, they face the same problems of rising competition and persistently high interest rates. But they also have terrific growth potential, thanks to their huge emerging market exposure.
HSBC, for instance, thinks markets like China and Hong Kong will help it to achieve double-digit profit growth. Lloyds has less opportunity to achieve such results, given its focus on the mature UK retail market.
There are many top FTSE 100 value stocks to choose from today. So I see no reason to invest my cash in high-risk Lloyds.
The post Lloyds’ share price is dirt cheap! But I’d still avoid it like the plague appeared first on The Motley Fool UK.
Should you buy Lloyds Banking Group shares today?
Before you decide, please take a moment to review this first.
Because my colleague Mark Rogers – The Motley Fool UK’s Director of Investing – has released this special report.
It’s called ‘5 Stocks for Trying to Build Wealth After 50’.
And it’s yours, free.
Of course, the decade ahead looks hazardous. What with inflation recently hitting 40-year highs, a ‘cost of living crisis’ and threat of a new Cold War, knowing where to invest has never been trickier.
And yet, despite the UK stock market recently hitting a new all-time high, Mark and his team think many shares still trade at a substantial discount, offering savvy investors plenty of potential opportunities to strike.
That’s why now could be an ideal time to secure this valuable investment research.
Mark’s ‘Foolish’ analysts have scoured the markets low and high.
This special report reveals 5 of his favourite long-term ‘Buys’.
Please, don’t make any big decisions before seeing them.
Claim your free copy now
More reading
2 dividend shares with a price below £2 and a yield above 4.3%
Which looks the better bank buy right now: Lloyds or NatWest shares?
Up 31%, do Lloyds shares have more to give?
Surely the Lloyds share price has gone too high?
At 58p, is Lloyds actually a penny stock? And is it a buy today?
HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
